Inflation - Could've Been Worse

Episode Summary

Executive Summary: The podcast focused on April inflation data and whether the Fed is still justified in waiting to cut rates. The hosts and guests argued that core inflation is much closer to target than headline CPI suggests, especially if owner’s equivalent rent is excluded via harmonized measures. They also covered deflation in vehicle prices, easing grocery inflation, persistent auto insurance stress, and how affordability is reshaping vehicle sales, credit, and the broader economy.

Main Topics: April CPI and the inflation outlook (Priority: 5/5): April CPI and core CPI came in as expected, with inflation moderating rather than reaccelerating. The panel debated whether the Fed should already view inflation as effectively at target. Owner’s equivalent rent and harmonized inflation measures (Priority: 5/5): The discussion centered on the distortions from OER in U.S. inflation measures and the case for harmonized CPI/PCE indices that exclude it to better reflect underlying inflation trends. Food inflation relief (Priority: 4/5): Grocery prices were flat on the month and near zero year over year, which was highlighted as one of the report’s clearest bright spots, though food-away-from-home remained sticky. Vehicle prices, affordability, and sales (Priority: 5/5): New and used vehicle prices were falling, but affordability remained a major constraint on auto sales, keeping the market below pre-pandemic norms despite strong miles driven. Auto insurance, maintenance, and claims pressure (Priority: 4/5): Insurance and repair costs remained elevated due to prior vehicle-price spikes, higher complexity, climate losses, and insurer losses, suggesting only gradual relief ahead. Credit stress and interest rates in auto lending (Priority: 4/5): Auto loan delinquency and charge-off pressures were discussed, with high rates and weak collateral values constraining consumers and lenders even as performance stabilized somewhat. Demand dynamics, miles driven, and macro implications (Priority: 3/5): Record miles driven and persistent housing/auto affordability issues were linked to structural changes in behavior, supply constraints, and potential effects on the Fed’s path.

Key Arguments: Underlying inflation is much lower than headline CPI suggests if OER is excluded, making a stronger case that the Fed is already near its target. The Fed risks over-tightening by relying on distorted inflation measures and could better preserve credibility by communicating with harmonized indices. Food-at-home inflation has essentially flattened, easing pressure on consumers even though restaurants remain sticky due to labor and demand. Vehicle prices are falling because incentives and discounting are returning, but structural cost pressures mean sticker prices remain elevated and affordability is still weak. Auto sales are constrained more by affordability than by demand, with higher prices and rates excluding a meaningful share of buyers. Elevated insurance premiums are likely to persist because insurers are still recovering from large losses and repair costs remain high. Serious auto credit stress is still present even if some delinquencies have stabilized, and falling collateral values can worsen charge-offs. Record miles driven show that driving behavior has normalized or shifted rather than collapsed, supporting continued vehicle wear-and-tear and service demand. Consumer expectations about inflation and rates may be politically skewed, which could alter purchasing behavior and delay auto/home buying decisions.

Data Points: Headline CPI (April, month over month): 0.3% - April CPI rose in line with expectations after two straight 0.4% increases. Headline CPI (year over year): 3.3% - Down from 3.5% in March. Core CPI (April, month over month): 0.3% - Slower than the prior three months’ 0.4% pace. Core CPI (year over year): 3.6% - Slowest since April 2021, down from 3.8% in March. Grocery prices (month over month): Flat / negative to zero - Food at home fell over the month, marking the third straight month with no or negative growth. Grocery prices (year over year): 1.1% - Near-zero inflation for food at home. Peak grocery inflation: 13.5% - Peak level in August 2022. Food away from home (year over year): 4.2% - Restaurants and food service remained elevated. Food away from home peak: 8.8% - Peak in March of the prior year. Used vehicle prices (year over year): -7% - Used car inflation remained negative. New vehicle prices since Feb. 2020: +20% - Marissa’s stat comparing current new-vehicle prices to pre-pandemic levels. Vehicle insurance since Feb. 2020: +46% - Insurance costs have risen far faster than vehicle prices. CPI overall since Feb. 2020: +21% - Used for comparison to vehicle-related inflation. Miles driven in the last 12 months: 3.3 trillion - Mike’s stat; record-high U.S. miles driven through March 2024. New vehicle sales (April annualized rate): 15.7 million units - Below the pre-pandemic 17 million-ish level. Average new-vehicle loan rate for super-prime buyers: 6.58% - Lowest average rate cited in April. Average used-vehicle loan rate for deep subprime buyers: 23.25% - Highest average rate cited in April. Average used-vehicle loan rate: ~14% - Referenced as the approximate average used-car financing rate. Auto insurance industry losses: -$50 billion - Chris’s stat: losses over 2022-2023. Auto vehicle maintenance and repair (year over year): ~8% - Still elevated even though April was flat month over month. Vehicle insurance (month over month, April): 1.7% - Decelerated from a higher March reading. Serious auto delinquency performance: Highest in the series since 2006 - April/March serious delinquency levels were the highest on record in the data series. Core PCE forecast (year over year, March): 2.8% - Mark’s stated starting point for the forecast path. Core PCE target timing: Mid-2025 - Moody’s forecast for core PCE to return to the Fed’s target. Auto market demand gap: ~10% of 2019 market - Jonathan estimated the higher-income/higher-credit shift eliminated about 10% of the pre-pandemic market.

Pivotal Quotes: "I would argue that we should exclude owners' equivalent rent when we're trying to understand what the underlying trend in inflation is." — Mark Zandi: Arguing that OER distorts inflation measures and should not guide policy so heavily. "Aren't we at target? Haven't we accomplished what we need to accomplish?" — Mark Zandi: Pressing the case that harmonized inflation measures show the Fed is effectively back at target. "We're going to call this a podcast." — Mark Zandi: Closing line after discussing inflation, vehicles, credit, and the outlook for rates.

Implications: If harmonized inflation measures are right, rate cuts could come sooner than the Fed signals. Vehicle and insurance costs should keep cooling, but high rates and affordability constraints may still suppress sales, lending, and housing activity.